10-QPeriod: Q1 FY2010

Monster Beverage Corp Quarterly Report for Q1 Ended Mar 31, 2010

Filed May 10, 2010For Securities:MNST

Summary

Hansen Natural Corporation (now Monster Beverage Corp.) reported a decrease in net sales and net income for the first quarter of 2010 compared to the same period in 2009. This decline was primarily attributed to 'Advance Purchases' made by customers in the fourth quarter of 2009, anticipating a new marketing contribution program and a transition to a new ERP system. Despite the revenue dip, case sales volume actually increased by 3.1%. The company's DSD (Direct Store Delivery) segment, which includes energy drinks, remained the dominant revenue driver, accounting for over 90% of net sales. Operating expenses increased significantly, impacting profitability. A notable point of concern for investors is the company's substantial investment portfolio, which includes a significant portion in auction rate securities (ARS). While the company has a put option for a portion of these ARS, the auctions for these securities have failed, leading to impairments and classification as trading securities. Management stated that despite the illiquidity of some investments, it does not anticipate a material impact on overall liquidity or working capital, but acknowledged the potential for further impairments.

Financial Highlights

25 data points
Beta

Revenue

$238.11M

52.3% Gross Margin

Net Income

$32.56M

13.7% Net Margin

EPS (Diluted)

$0.03

Cash & Equivalents

$375.91M

Free Cash Flow

$66.57M

Financial Statements
Beta
Revenue$238.11M
Cost of Revenue$113.56M
Gross Profit$124.55M
Operating Expenses$73.77M
Operating Income$50.78M
Net Income$32.56M
EPS (Basic)$0.03
EPS (Diluted)$0.03
Shares Outstanding (Basic)1.06B
Shares Outstanding (Diluted)1.12B

Key Highlights

  • 1Net sales for Q1 2010 decreased by 2.5% to $238.1 million, compared to $244.2 million in Q1 2009, largely due to customer inventory build-up in the prior quarter.
  • 2Net income decreased by 21.7% to $32.6 million ($0.35 per diluted share) in Q1 2010 from $41.6 million ($0.44 per diluted share) in Q1 2009.
  • 3Case sales volume (in 192-ounce case equivalents) increased by 3.1% to 24.2 million cases, though the average price per case decreased by 5.5% to $9.84.
  • 4Operating expenses rose by 14.5% to $73.8 million, driven by increased payroll, sponsorships, endorsements, and professional service fees.
  • 5The company holds significant investments in auction rate securities (ARS), with $92.7 million face value as of March 31, 2010. Failed auctions have led to impairments and reclassification of a portion to trading securities.
  • 6Cash flow from operating activities significantly improved to $68.0 million in Q1 2010, a substantial turnaround from negative $3.7 million in Q1 2009.
  • 7The DSD segment, primarily energy drinks, continues to be the core business, representing 91.2% of net sales in Q1 2010.

Frequently Asked Questions

The decrease in net sales and net income was primarily due to 'Advance Purchases' made by customers in the fourth quarter of 2009. These purchases were made in anticipation of a new marketing contribution program for distributors starting January 1, 2010, and potential supply interruptions during the transition to a new SAP enterprise resource planning system. This forward buying pulled sales into the prior quarter, impacting the current quarter's performance.

Hansen Natural Corporation had approximately $92.7 million in auction rate securities as of March 31, 2010. The auctions for these securities have failed, making them illiquid. The company has a put option for a portion of these securities, which has led to their reclassification as trading securities and has also resulted in impairments. While management believes this will not materially affect overall liquidity, there's a risk of further impairments if market conditions worsen or credit ratings decline.

Operating expenses increased by 14.5% to $73.8 million in the first quarter of 2010 compared to the prior year. This rise was mainly driven by higher payroll expenses (including an increase in stock-based compensation), increased spending on sponsorships and endorsements, and higher professional service fees (legal and accounting).

The 'Advance Purchases' refer to customers buying more product than usual in the fourth quarter of 2009. This was done to benefit from a new distributor marketing program starting in 2010 and to avoid potential supply issues during the company's ERP system transition. This phenomenon pulled sales forward, causing a year-over-year decline in net sales and net income for the first quarter of 2010, making direct comparison to the prior year's Q1 less straightforward.